Bad Loans Bank discussions ongoing
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The proposed Public Debt Management Agency (PDMA) eliminating the Central Bank's responsibility to manage public debt, will speed up an Asset Management Company (Bad Bank) or non-performing loan (NPL) bank to take over the toxic assets of the banks and secure them for the banks to carry on operations.
Ministry of Finance officials said this was approved by the last budget, but progress was very slow. Now the discussions are at the initial stages and the bad bank is envisioned with supporting recovery powers legislated by Parliament, and with all conceivable powers, including those of the banks to recover the toxic assets of the banks.
He added that Sri Lanka can take lessons from Malaysia's Danaharta established in 1998 to remove nonperforming loans from the financial system and maximising their recovery.
“We are at the initial stages of discussion with technical experts of the World Bank in this regard,” a Finance Ministry official told the Business Times. He said the Financial Asset Management Companies Act will also have to come in to enable banks and finance companies to separate and transfer their NPLs and bad assets to the Asset Management Company (AMC). He said the model of the AMC is to take away bad loans at a discount and focus on recovering debt. “First, the non-performing loans will be identified and organised into one of four categories such as selling, recovering, restructuring and writing off of these loans according to their individual characteristics and then resolved.”
He added that Sri Lanka can take lessons from Malaysia's Danaharta established in 1998 to remove nonperforming loans from the financial system and maximising their recovery. The Danaharta Act granted the agency special legal authority to more efficiently resolve NPLs.
Two years ago, India set up India Debt Resolution Co Ltd, an AMC that will work in tandem with the National Asset Reconstruction Company to clean up bad loans. This company manages the stressed assets and engages market professionals and turnaround experts.